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All power to the striking workers!
Jun. 3rd, 2010 12:19 pmBut not in the UK, obv. I've written before that one of the fundamental problems causing the ongoing global economic crisis is that China and Germany are running huge trade surpluses, and their general solution to this is "well, if you ran a trade surplus too, you'd be fine -- consume less!" -- without, it would appear, working out that until Mars starts importing our stuff, trade balances globally are a zero sum game.
The preferred US/UK solution is that China and Germany start, er, consuming a bit more (the alternative, export a bit less, is not mentioned, since that would cause a 1930s-type depression).
Germany, continuing in its state of near-pathological denial, sees anything so degenerate as actually spending some of your trade balance surplus as congenitally inflation-causing. Indeed, in the past decade, since Germany entered the euro at too high a level compared with its "partners", it has ruthlessly cut costs to maintain its favourable trade balance. This has resulted in the German workforce only getting about a 2% rise in living standards in the past decade. No wonder they treat the Greek bleatings with a certain amount of contempt.
In China the situation has been rather different. The ruling elite, for obvious political reasons, doesn't want living standards to rise too quickly. This would just create too much potential instability. As a result, for more than a decade now it has been running a huge surplus with the US. With that surplus it bought US bonds, thus helping cause the credit boom in the US -- a decade of consuming beyond its means.
Solutions to this ongoing problem looked thinner on the ground than Mr McNit of $100 Buy In McNit table putting all of his money in with less than top set. But in the past week there has been a glimmer of hope -- suicidal and striking workers.
You've got to give it to the Chinese, they know how to express a grievance. At Foxconn in Shenzhen the general expression was in the form of suicide. And it seems to have worked. The management has offered a 30% wage hike. Meanwhile the Honda workers have also gone on strike, and have got a near 25% wage increase as a result.
If, (and it's a big if) these Chinese workers actually spend some of their income -- i.e., if the savings ratio doesn't increase along with rises in earnings, then there is actually some hope for fiscal stimulus from China. Either it imports more or it allocates more to domestic consumption and less to exports. From the US and western Europe point of view, the "import more" option is obviously preferable.
There's another factor at work here which isn't so rosy -- demographics. The old "one family, one child" policy of a few decades ago has, in a way, had the same impact as the Black Death did in Europe in the 14th century. Fewer people of working age means that supply does not meet demand, which means that companies have to pay higher wages and/or improve their technology. Labour-intensive production techniques will be replaced by more efficient means of production. But in terms of global macro-economics, it's not good. If you have 150% higher wages but only 67% of the number of workers, you might get a higher level of consumption per worker, but it won't translate into any benefit for the west.
But let's ignore that possible fly in the ointment for the moment. Let's look at the implications of the two possible knock-ons from salary increases:
a) import more consumer goods, export the same as before. Impact, v good for west. A whole new market opens up. Equities grow worldwide, a "golden" solution is found as China gets its production and consumption into balance.
b) import the same, export less. Impact, not-so-good for the west. With an increased demand at home, the cost of exported goods go up. Our living standards go down, and inflation is imported. But production is not increasing. Serious threat of stagflation if inflationary expectations become entrenched. Alternatively, a lost decade of depression and lack of liquidity. Banks become insolvent. Capital becomes scarcer. China picks up assets on the cheap in the west in return for exporting some of its capital to the west. However, globally there is a move back to "balance", so at least the situation vis-a-vis the west v China will not get worse. Keynesian stimulation could be used. Some debts get wiped off the face of the planet. Dollar strengthens even more as T-bills become the haven of last resort. Sterling doesn't do badly. Bad news for Eurozone.
c) savings ratio increases. Impact, horrible. Bascially, the workers carry on doing exactly what the state had been doing on their behalf. I think that this is somewhat unlikely, though. After all, this demographic has ageing parents to support. And the fact that they have gone on strike would seem to indicate that they want to DO something with the extra money. This isn't a theoretical "hmm, we think we should have a bigger share of the profits, although we don't plan to spend any of it when you give it to us" strike (I really think that that kind of industrial action could only ever take place in Germany). No, it's a "we've seen the TV, we can see what's available (including a better TV and a car rather than a scooter) and we want it".
Inflation is kicking off in China and India. I really can't see this not being exported to the west in at least some form. Asset deflation through stagnant asset prices looks the bets prediction that we have available.
As Alistair Heath put it in City AM this morning, the UK might be facing years of stagnant living standards, but it isn't on the verge of collapse.
That said, the numbers for our banks still look rather horrid. Debts in Europe are continuing to come out of the woodwork, and Ireland has said that it will have to bail out Anglo-Irish Bank AGAIN, with the eventual requirement reaching double the €10.3bn that it has already swallowed up. I make that about €7,000 for every economically producing person in Ireland. And this is just a relatively small player in the grand scheme of things. Greece and Ireland are, to be honest, not really worth bothering about in terms of the potential for a eurozone collapse. The countries that really matter are Spain and Italy.
At the moment, Spain is hurriedly papering over the cracks by pretending that if you combine together four bits of shit you somehow end up with something other than a single massive pile of shit. Caja Murcia, Caixa Penedes, Caja Granada and Sa Nostra will create a lender with €73bn in assets, 4m customers and 1,703 branches. Well, ain't that dandy? Unfortunately, the bad loans don't suddenly mysteriously disappear just because you have got bigger. Indeed, it said that it would "tap" the rescue fund, but wouldn't say how much for.
AT least 16 savings banks are looking to merge, presumably so that someone else can take the flak when the shit hits the fan. The Spanish "cajas" (savings banks, also "caixa" in Catalan) lent €243bn of the €454bn in real estate loans currently outstanding. The government rescue fund can hold up to €99bn (that's the limit imposed by the EU), and there's the small technical problem of where this will be raised (China, anyone?). Thus, it would appear, Spain is girding itself for a 25% rate of default as a result of its misjudged property boom. My hunch would be that this is enough, so long as a whole raft of insolvencies didn't hit at the same time. That's because an insolvency causes a temporary strain on liquidity. If a €110bn institution goes under, its eventual shortfall might only be five or 10 billion, but the amount of cash needed to tide it over until that shortfall is monetized, is significantly greater.
_____________
The preferred US/UK solution is that China and Germany start, er, consuming a bit more (the alternative, export a bit less, is not mentioned, since that would cause a 1930s-type depression).
Germany, continuing in its state of near-pathological denial, sees anything so degenerate as actually spending some of your trade balance surplus as congenitally inflation-causing. Indeed, in the past decade, since Germany entered the euro at too high a level compared with its "partners", it has ruthlessly cut costs to maintain its favourable trade balance. This has resulted in the German workforce only getting about a 2% rise in living standards in the past decade. No wonder they treat the Greek bleatings with a certain amount of contempt.
In China the situation has been rather different. The ruling elite, for obvious political reasons, doesn't want living standards to rise too quickly. This would just create too much potential instability. As a result, for more than a decade now it has been running a huge surplus with the US. With that surplus it bought US bonds, thus helping cause the credit boom in the US -- a decade of consuming beyond its means.
Solutions to this ongoing problem looked thinner on the ground than Mr McNit of $100 Buy In McNit table putting all of his money in with less than top set. But in the past week there has been a glimmer of hope -- suicidal and striking workers.
You've got to give it to the Chinese, they know how to express a grievance. At Foxconn in Shenzhen the general expression was in the form of suicide. And it seems to have worked. The management has offered a 30% wage hike. Meanwhile the Honda workers have also gone on strike, and have got a near 25% wage increase as a result.
If, (and it's a big if) these Chinese workers actually spend some of their income -- i.e., if the savings ratio doesn't increase along with rises in earnings, then there is actually some hope for fiscal stimulus from China. Either it imports more or it allocates more to domestic consumption and less to exports. From the US and western Europe point of view, the "import more" option is obviously preferable.
There's another factor at work here which isn't so rosy -- demographics. The old "one family, one child" policy of a few decades ago has, in a way, had the same impact as the Black Death did in Europe in the 14th century. Fewer people of working age means that supply does not meet demand, which means that companies have to pay higher wages and/or improve their technology. Labour-intensive production techniques will be replaced by more efficient means of production. But in terms of global macro-economics, it's not good. If you have 150% higher wages but only 67% of the number of workers, you might get a higher level of consumption per worker, but it won't translate into any benefit for the west.
But let's ignore that possible fly in the ointment for the moment. Let's look at the implications of the two possible knock-ons from salary increases:
a) import more consumer goods, export the same as before. Impact, v good for west. A whole new market opens up. Equities grow worldwide, a "golden" solution is found as China gets its production and consumption into balance.
b) import the same, export less. Impact, not-so-good for the west. With an increased demand at home, the cost of exported goods go up. Our living standards go down, and inflation is imported. But production is not increasing. Serious threat of stagflation if inflationary expectations become entrenched. Alternatively, a lost decade of depression and lack of liquidity. Banks become insolvent. Capital becomes scarcer. China picks up assets on the cheap in the west in return for exporting some of its capital to the west. However, globally there is a move back to "balance", so at least the situation vis-a-vis the west v China will not get worse. Keynesian stimulation could be used. Some debts get wiped off the face of the planet. Dollar strengthens even more as T-bills become the haven of last resort. Sterling doesn't do badly. Bad news for Eurozone.
c) savings ratio increases. Impact, horrible. Bascially, the workers carry on doing exactly what the state had been doing on their behalf. I think that this is somewhat unlikely, though. After all, this demographic has ageing parents to support. And the fact that they have gone on strike would seem to indicate that they want to DO something with the extra money. This isn't a theoretical "hmm, we think we should have a bigger share of the profits, although we don't plan to spend any of it when you give it to us" strike (I really think that that kind of industrial action could only ever take place in Germany). No, it's a "we've seen the TV, we can see what's available (including a better TV and a car rather than a scooter) and we want it".
Inflation is kicking off in China and India. I really can't see this not being exported to the west in at least some form. Asset deflation through stagnant asset prices looks the bets prediction that we have available.
As Alistair Heath put it in City AM this morning, the UK might be facing years of stagnant living standards, but it isn't on the verge of collapse.
That said, the numbers for our banks still look rather horrid. Debts in Europe are continuing to come out of the woodwork, and Ireland has said that it will have to bail out Anglo-Irish Bank AGAIN, with the eventual requirement reaching double the €10.3bn that it has already swallowed up. I make that about €7,000 for every economically producing person in Ireland. And this is just a relatively small player in the grand scheme of things. Greece and Ireland are, to be honest, not really worth bothering about in terms of the potential for a eurozone collapse. The countries that really matter are Spain and Italy.
At the moment, Spain is hurriedly papering over the cracks by pretending that if you combine together four bits of shit you somehow end up with something other than a single massive pile of shit. Caja Murcia, Caixa Penedes, Caja Granada and Sa Nostra will create a lender with €73bn in assets, 4m customers and 1,703 branches. Well, ain't that dandy? Unfortunately, the bad loans don't suddenly mysteriously disappear just because you have got bigger. Indeed, it said that it would "tap" the rescue fund, but wouldn't say how much for.
AT least 16 savings banks are looking to merge, presumably so that someone else can take the flak when the shit hits the fan. The Spanish "cajas" (savings banks, also "caixa" in Catalan) lent €243bn of the €454bn in real estate loans currently outstanding. The government rescue fund can hold up to €99bn (that's the limit imposed by the EU), and there's the small technical problem of where this will be raised (China, anyone?). Thus, it would appear, Spain is girding itself for a 25% rate of default as a result of its misjudged property boom. My hunch would be that this is enough, so long as a whole raft of insolvencies didn't hit at the same time. That's because an insolvency causes a temporary strain on liquidity. If a €110bn institution goes under, its eventual shortfall might only be five or 10 billion, but the amount of cash needed to tide it over until that shortfall is monetized, is significantly greater.
_____________
